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Archive for the ‘qualifying for bankruptcy’ tag

Simple and Not-so-simple Debts in Chapter 7 and 13

November 24th, 2017 at 8:00 am

Very broadly speaking Chapter 7 handles simple debts as well or better than Chapter 13 does, which handles more difficult debts better.


Debts in Bankruptcy

When deciding between Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” you look at many factors. You have to meet certain qualifications (usually easy to meet) to file either one. The amount of your income, the nature of your assets, whether you own a business, and your immediate and long-term goals—all of these come into play.

But the most important consideration is your debts. Bankruptcy is of course mostly a tool for dealing with your debts. Chapter 7 and Chapter 13 each deal better than the other with certain types and combinations of debts.

Today we get into which of these two consumer bankruptcy options is better for which debt scenarios.

A Helpful Starting Point

Our first sentence gives us a good starting point. Chapter 7 handles simple debts as well or better than Chapter 13 does, which handles more difficult debts better.

So if you have mostly or all simple debts, then Chapter 7 will tend to be better for you. If you have a number of difficult debts, Chapter 13 will more likely be better.

The Different Types of Debts

There are basically three types of debts:

  1. General unsecured—There’s no collateral or “security” tied to these debts (“unsecured”), and they aren’t “priority”—given special treatment in the law. General unsecured debts include most credit cards, medical debts, no-collateral personal loans, utility bills, back rent, and many, many others.
  2. Secured—The debts are legally tied to collateral or with a lien on something of value. Included are home mortgages, vehicle loans, retail debts secured by the goods purchased, personal loans secured against personal possessions, business loans secured by business and/or personal assets—all debts secured by anything you own.
  3. Priority—Simply, debts that the law treats as special for whatever policy reason. The main examples for consumer debtors are recent income and other taxes, and child and spousal support.

These different types of debts are treated differently in Chapter 7 vs. Chapter 13.

Debt Scenarios Handled Well by Chapter 7

If ALL your debts are general unsecured debts, Chapter 7 will more likely be your better option. Most general unsecured debts are discharged—legally written off—in a Chapter 7 case. So you file a Chapter 7 case through your bankruptcy lawyer in usually less than 4 months all your debts are discharged. You have your fresh financial start.

Some secured debts are handled reasonably well in a Chapter 7 case. If you are current on a home mortgage or vehicle loan, you can usually keep your home or vehicle by maintaining your payments and “reaffirming” the debt. If you are very close to being current, you may be able to catch up and “reaffirm” as well. If you are surrendering a home or vehicle (or any other collateral) Chapter 7 often works well for that.

Chapter 7 may be appropriate for dealing with certain limited priority debts. If you owe an income tax debt or are behind on child support, discharging all or most of your other debts may enable you to catch up on the tax or support. But you are subject to collection actions by the tax authorities as soon as your Chapter 7 is over. And as for support debt, a Chapter 7 filing does not stop its collection even while your bankruptcy case is active. So if you owe any tax debt that you can’t comfortably pay through a standard IRS/state payment plan, Chapter 13 may be the better option. And if you are behind on child or spousal support, only Chapter 13 can stop the aggressive collection actions that an ex-spouse or support collection agencies can use against you.

Debt Scenarios Not Handled Well by Chapter 13

If ALL your debts are general unsecured debts, Chapter 13 is usually not your better option (assuming you have a choice). That’s because unlike Chapter 7, in a Chapter 13 case you usually have to pay a portion of your general unsecured debts. You pay as much of those debts as you can afford to do so over a 3 to 5-year period. Then the portion you did not pay gets discharged.

It’s important to understand that the general unsecured debts are often paid relatively little in a Chapter 13 case. It’s common that you’d pay only 5 or 10 cents on the dollar, and almost always no interest or penalties. In many parts of the country you can even pay 0 cents on the dollar. That’s because the debtor owes secured or priority debts which use up all the money he or she can afford to pay.

Debt Scenarios Handled Well by Chapter 13

Chapter 13 deals with secured debts often better than does Chapter 7. That’s especially true if you’re behind on a debt with collateral you really want to keep. Under Chapter 7 you’d usually have to get current on a vehicle almost immediately to be able to keep it. You have many months—or even a year or two—to catch up under Chapter 13. If you’re behind on your home mortgage you get up to 5 years to catch up.

Chapter 13 also gives you some very powerful tools for dealing with secured debts unavailable under Chapter 7. You may be able to “strip” a second or third mortgage off your home’s title. You may be able to do a “cramdown” on your vehicle loan or other personal property debt, potentially greatly reducing your monthly payment and the total you pay.

With priority debts, Chapter 13 gives you tremendous power and flexibility. It stops collection of support arrearage, and gives you months or years to catch up—as long as you keep current on ongoing support. With unpaid income taxes Chapter 13 provides many benefits. It prevents future tax liens. It enables you to deal with prior-recorded tax liens extremely well. Chapter 13 gives you up to 5 years to pay taxes that can’t be discharged. Usually throughout that time you pay no ongoing interest or penalties.

Conclusion 

It’s a bit of an oversimplification to say that simple debts lead to Chapter 7 while more complicated ones lead to Chapter 13. But, as we’ve just shown, that’s often the situation.

But just as you are a unique human being, your circumstances are unique. Get the unique assessment of your options that you need from an experienced and empathetic bankruptcy lawyer.

 

Good Timing Can Shorten Your Chapter 13 Case by 2 Years

October 11th, 2017 at 7:00 am


We show how wise timing in your filing of a Chapter 13 “adjustment of debts” case could shorten your payment plan from 5 years to 3 years.  


Chapter 7 vs. Chapter 13

Two days ago we showed the importance of timing in the filing of a Chapter 7 case. The timing can affect whether you can qualify to be in a Chapter 7 “straight bankruptcy” case. If your income is too high you may not pass the “means test.” If you can’t pass this test you’d instead have to go through a Chapter 13 “adjustment of debts” case. That requires you to pay for 3 to 5 years into a payment plan, instead of being able to “discharge” (write off) all or most of your debts within about 4 months.

But what if you need a Chapter 13 case? It can be the much better option in certain circumstances. If you have debts that can’t be discharged like recent income taxes or child/spousal support, or debts you want to catch up on like a home mortgage, Chapter 13 buys you time to take care of those special debts. There are many other reasons Chapter 13 may be better for you than Chapter 7.

So assume you want to file a Chapter 13 case. One important question is how long you will be required to pay into your payment plan. Sometimes you’d want to have as much time as possible to stretch out and lower your plan payments. But in other circumstances you’d just want to get it over with as soon as possible. Then you can get on with life, and if you want start rebuilding your credit.

Your “Income” Dictates the Length of Your Chapter 13 Case

There is no “means test” under Chapter 13. Yet the same unusual way of calculating income in the Chapter 7 “means test” is used in Chapter 13. That same unusual calculation of income determines whether your payment plan can be 3 years long or instead must last 5 years.

So let’s look briefly again at how income is calculated.

The Chapter 13 Calculation of Income

To calculate your income for this purpose:

  • includes almost all sources of money other than from Social Security (not just taxable income)
  • total all gross amounts received precisely during the 6 FULL calendar months prior to filing your case
  • multiply this 6-month amount by 2 for the annual “income” total
  • compare that annualized amount to the “median income” for your state and family size

You may finish your Chapter 13 case in 3 years instead of 5 if your income is no larger than the applicable “median income” for your state and family size.

The “median income” amounts are adjusted regularly and are available online. You can find those state-by-state amounts for cases filed starting May 1, 2017 and for several months thereafter here. (And if you’re reading this well after this date, check here to see if this table has subsequently been updated.)

If you want you can go through each of the specific steps in this calculation right on the official bankruptcy court form. Download or print the Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period (effective 12/1/15).

How Smart Timing of Filing Can Make Such a Difference

See our last blog post for an example how even just a day or two difference in the date of filing a case can put you over or under your applicable “median income” amount.

This is even more crucial in Chapter 13 than in Chapter 7. In Chapter 7 the income step is just the first step of the “means test.” Even with higher-than-median income you may be able to pass the “means test” based on your expenses or other considerations. But under Chapter 13 your income as calculated above determines whether or not you’re required to be in it for 5 years.

Important Practical Notes

Even if your income ALLOWS you to finish in 3 years you can usually take longer if you want. As mentioned above, you may want to stretch out and so reduce your monthly payments. But in this situation you’d not be REQUIRED to go the full 5 years. And you generally don’t pay any more to your creditors while doing so.

Also, if you ARE required to go the full 5 years based on your income that doesn’t always hurt you. To pay everything you want and need to pay may take that long, without necessarily paying more to your creditors.

However, there ARE situations in which based on your budget you could finish your payment plan in 3 years. Or other situations in which you could finish sometime between 3 and 5 years. In these situations being required to go the full 5 years means paying more to your creditors—sometimes much more. And it delays getting to that point in time when you can actually start your fresh financial start.

 

The Means Test is Based on Timing

October 6th, 2017 at 7:00 am

Most people easily pass the means test based on their relatively low income. Timing plays a huge role in calculating your income.   


The Means Test

To file and complete a Chapter 7 “straight bankruptcy” case you have to qualify for it. The main hurdle in qualifying is what’s called the “means test.”  That is, to qualify for Chapter 7 you have to show that you don’t have too much “means.”

You do that mostly through your income. The start, and for most people the end, of the means test involves comparing your income to a set median income amount. If your income is no more than median income amount for your family size in your state, you pass the means test.                  

Being able to file a Chapter 7 case by passing the means test is usually very important. That’s because if you have more “means” (income) than you’re allowed, you usually have to file a Chapter 13 case instead. That involves a 3-to-5-year payment plan, instead of the 3-4-month Chapter 7 procedure. Chapter 13 is great in the right circumstances. It has great tools unavailable under Chapter 7. But if you just need the quick relief of Chapter 7 being forced instead into a Chapter 13 case is a serious setback.

The Timing Focus of the Means Test

As we said above, the easiest way to pay the means test is for your income to be no larger than the published “median income” amount for a family of your size in your state. If your income is no more than that then right away you’ve passed the test. You’ve overcome the biggest qualification for filing a Chapter 7 case.

But your income for purposes of the means test is not calculated in any way you might think. In particular the timing aspect of how your income is calculated is unusual.

Your income for purposes of the means test is not based on your income for the previous calendar year, or prior 365 days or 12 months. It’s not based on any kind of annual basis. Instead it’s based on your income of the six full calendar months prior to the filing of your case.

  • For example, if you and your bankruptcy lawyer file your case during any day in October 2017, the pertinent prior-six-full-calendar-month period is from April 1 through September 30, 2017. After adding up the income received during that six-month period multiply it by two for the annual amount.
  • Your income for the means test is not just your “taxable income.” Instead include just about every bit of income or money you receive from all sources during that period of time. This includes irregular sources of money such as child and spousal support payments, insurance settlements, unemployment benefits, and bonuses. However, exclude all types of social security-based income.

The Median Income Amount for Your Family Size and State

The last step is to compare your income amount as you just calculated to the median income for your state and your size of family. You can find that median income amount in the table that you can access through this website. (This median income information gets updated every few months so be sure to use the current table.)

Conclusion

If your income, as calculated in this distinct way, is no more than the median income for your state and family size, then you’ve cleared the means test hurdle! You can very likely proceed through Chapter 7 bankruptcy.

Next time we’ll focus on the opportunities presented by this quirky way of calculating income for the means test.

 

“Residence” and “Domicile” in Bankruptcy

September 30th, 2016 at 7:00 am

Your domicile, and sometimes your residence, determines whether you can file bankruptcy, where to file, and what property you keep.

 

1. Who Can File Bankruptcy? A person can file a bankruptcy case in a U.S. bankruptcy court if he or she “resides or has a domicile, a place of business, or property in the United States.” (Section 109(a) of the U.S. Bankruptcy Code.)

2. Where Can You File? The bankruptcy case must be filed in the bankruptcy court of the federal judicial district in which the person filing the bankruptcy has his, her, or its domicile, residence, principal place of business… , or principal assets.” (28 U.S. Code Section 1408.)

3. What Property Can You Keep? The person filing bankruptcy (the “debtor”) uses the set of “exemptions” (to protect property from creditors) available “at the place in which the debtor’s domicile has been located for the 730 days immediately preceding” the date of the bankruptcy filing.  (Section 522(b)(3) of the Bankruptcy Code.)

So What’s a Domicile?

This term is not defined in the Bankruptcy Code.

In general your domicile is the place that you consider your present permanent home.

Most of the time it is the area where you live, with the intention of continuing to live there. Here’s a straightforward example. You and your spouse have purchased and are living in a home, and use that address for all residential purposes. That address is on your driver’s license, income tax returns, and virtually all other official records.

But sometimes your domicile is not where you are living now temporarily. Rather it’s where you intend to return to because you consider that place to be your home. Here’s an example. You’ve been living in one area for a long time and consider it your home. But some temporary reason—a short-term job, a dying parent—induces you to move elsewhere. You don’t change your address on your driver’s license or income tax returns. You are clear in your mind that you are away from home and intend to return.

You can have only one domicile. It can of course change, but only if you intend to change it and make changes showing your intention.

And Now What’s a Residence?

This is also not defined in the Bankruptcy Code. Your residence is the place you are currently residing. As noted above, you don’t always reside in your domicile.

You can change residences by simply moving from one place to another. If you usually spend part of the year in one place and another part of the year in another place, your residence changes as you go from one to the other. (Your domicile would be in one of these places, the one that you consider your home more than elsewhere.)

Here’s an example. You are a high school teacher, whose extended family lives in another state. For years you’ve taught summer school while living in a brother’s spare bedroom in that other state. So you have two residences, the one during the school year and the other where spend your summers.

Applying These Terms

So, reinforcing what we just learned:

1. You can file bankruptcy in the U.S. if you reside or have your domicile in the United States.

2. You can file in the federal judicial district either where you reside or where you have your domicile.

To give you a better sense of this, there are 94 federal judicial districts. About half the states make up one district each. Most of the other states are divided into two or three districts. Three states—California, Texas, and New York—each have four districts.

So, if you have residences in different federal districts, you can file bankruptcy wherever you have a residence. (You can also file wherever you have a principal place of business or your principal assets.)

3. The use of the property exemptions available to a state’s residents requires not just residency but being domiciled in that state for 730 days—2 years. If you’ve not been domiciled in one place for the last 2 years, you use the exemptions available to the place where you were domiciled during the 180 days immediately before 2 years ago.

The purpose of this rule is supposedly to prevent “exemption shopping”—moving to an area for its better exemptions. Arguably this was a unnecessary solution to a non-existent problem. But it’s a rule that you must live with regardless if you’ve moved your domicile in the last two years. Be sure to tell your bankruptcy lawyer about it when you first meet so he or she can advise you appropriately.

“Credit Counseling” and “Debtor Education”

September 28th, 2016 at 7:00 am

These two requirements are quite straightforward to accomplish, but can trip you up if you don’t take care of them when you need to.

 

“Credit Counseling”

Before you can file a personal bankruptcy case, you have to go through what is essentially a simple bureaucratic formality. But it IS a strict legal requirement that can cause unnecessary headaches if not done correctly. So it’s important to understand the “credit counseling” requirement. 

The U.S. Bankruptcy Code requires the following during the 180 days before filing a bankruptcy case. You must get, “from an approved nonprofit budget and credit counseling agency,” “an individual or group briefing (including… by telephone or on the Internet) that outline[s] the opportunities for available credit counseling and assist[s]… in preforming a related budget analysis.” (See Section 109(h) of the Bankruptcy Code.)

This “counseling” is really a simple procedure.  You provide information, usually online, about your debts, income, and expenses. You are then almost always informed that you do not have enough income to meet your expenses. The practical result is you get an emailed certificate stating that you’ve received the required “counseling.” That enables you to file bankruptcy.

The timing is critical. The certificate of completion is good for only 180 days. So don’t do the “counseling” unless you will be filing bankruptcy within that time. But also don’t hold off too long to avoid being pressed for time when it’s time to file bankruptcy.

What’s the point of this requirement? It’s to encourage people to consider alternatives other than bankruptcy. The Government Accountability Office has called that into question:

The counseling was intended to help consumers make informed choices about bankruptcy and its alternatives. Yet… by the time most clients receive the counseling, their financial situations are dire, leaving them with no viable alternative to bankruptcy. As a result, the requirement may often serve more as an administrative obstacle than as a timely presentation of meaningful options.

“Debtor Education”

Beyond this “credit counseling” before filing your bankruptcy case, you must also complete “an instructional course concerning personal financial management” after filing the case.” You have to do this “debtor education” to get a discharge of your debts.

“Debtor education” is required in both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” cases. (See Sections 727(a)(11) and 1328(g) of the Bankruptcy Code.)

The most important thing about “debtor education” is to get it done, and on time.

The main goal of a Chapter 7 case is to get a discharge of your debts. Most Chapter 13 cases have that as a major goal as well—to discharge whatever debts are not paid during your case. If you do not complete the “debtor education” step, your bankruptcy case will close but you will not receive a discharge of your debts. You would have spent a lot of money and effort without accomplishing your main goal.

“Debtor education” is a 90-minute or so class is “designed to assist debtors in understanding personal financial management.“ This includes the appropriate use of credit, and budgeting skills. Like “credit counseling,” it can be done online, over the phone, or in person; in English or various other languages. When both spouses file a joint bankruptcy, both spouses must take this course. When you complete the course, you receive a certificate of completion which your lawyer files at the court.

Also like “credit counseling,” the service is provided by a long list of agencies approved by the U.S. Trustee’s Office. These agencies’ quality, convenience, and cost can vary widely, so get a recommendation about which one to use from your bankruptcy lawyer.

Bankruptcy–A Moral Choice

April 1st, 2016 at 7:00 am

When is it moral to break your promises to pay your debts?

 

We Humans Are Moral Creatures

Your decision about whether to file bankruptcy could sensibly be just a weighing of its economic costs and benefits.            

But there’s more to life than dollars and cents. Whether in the front of our minds or nagging us in the back of our minds is the very human question: “Is it the right thing to do?”

Our important life choices are often moral ones. They are choices between doing what’s right and doing what’s wrong.

When deciding about bankruptcy you could skip that part of the decision-making process. You could make it a purely economic decision. But there’s a good chance that will leave you at least vaguely unsettled. You’ll likely feel good about the decision only after you believe in your head and heart that filing bankruptcy really was the right thing to do.

How to Make a Good Moral Decision 

1. Know what got you here.

What got you to this point of financial crisis? Over the years you made a bunch of legal commitments to your creditors to pay your debts. What has gotten in the way of you sticking with those commitments? Is there anything you would have done differently, and WILL do differently in the future?

2. Consider the moral costs and benefits of attempting to meet your financial commitments.

Don’t just look at the financial and legal costs and benefits of filing bankruptcy or not doing so—impacts on your credit record, your monthly budget, your present and future debt service.

What are the moral costs and benefits?

To the extent that you continue to struggle to pay your debts, the moral benefit is the one you likely focus on when you think about doing what’s right: you keeping your promises to pay your debts.

But consider the costs if you continue down that route.  Consider the potential detriments to your physical health from working too many hours and from the stress. Consider your emotional health. Consider how the financial pressures affect your marriage and other significant relationships. Consider what responsibilities you have to your children and other dependents, now and in the future. And consider not just financial responsibilities but the time and attention from you that they need. Extend your responsibilities not just to yourself and your family but also to your broader community.

Don’ts just focus on your moral obligation to your creditors. It’s not only appropriate but even necessary to balance that against obligations to yourself, to your spouse, to your kids, and to society in general.

3.  Focus on making a good decision now.

The past and its decisions are in the past. Accept the responsibility to make the best decisions that you can now.

This means facing your situation honestly and realistically. It is normal to be afraid to face tough realities, ones that make you feel embarrassed and even ashamed. Dealing with it challenges your self-image. Find the courage to be honest with yourself.

Avoid avoidance behavior! Otherwise you’re just staying with the status quo by default. That’s very likely not the morally best route. It’s seldom even the economically most sensible route.

4. Get legal advice about your options.

You need to know your available legal options and all the consequences of those options. Only then can you weigh your options and decide on the right thing to do—morally as well as financially.

You can’t make a good decision without knowledge. And you can’t have adequate knowledge about your options and their consequences without the guidance and advice of a dedicated professional who has spent years, day in and day out, dealing with these kinds of decisions.  

Self-education in the law only goes so far. And it’s not nearly far enough to make the right decisions, on your own behalf much less on behalf of anybody else who relies on you.  

Your bankruptcy lawyer is your legal advisor, not your moral one. So he or she will respect that the final decisions are up to you. But he or she is human, too, and recognizes that it’s a tough choice for you. Having counseled many people making these kinds of decisions, your lawyer should be able to help you find moral closure with yours. If not, find one who does.  

5.  Weigh your available options and decide.

Do whatever you know helps YOU make good decisions. Get motivational help from the right people and resources. Get past your embarrassment and talk with people whose advice you value—your genuine friends, and emotional and spiritual counselors. If it helps, write in your journal about it.

Do whatever it takes to focus on the task. Then make the decision and get it done.

 

A Chapter 13 Debt Limit Increase

March 9th, 2016 at 8:00 am

As of April 1, 2016 you can have a little more debt and still qualify for a Chapter 13 “adjustment of debts.”

 

Why Debt Limits in Chapter 13?

You can have an unlimited amount of debt when you file a Chapter 7 “straight bankruptcy.” However, there are debt limits when filing a Chapter 13 “adjustment of debts for an individual with regular income.” How come the difference?

Chapter 7 is relatively straightforward, and in most consumer cases is done in only 3 or 4 months. There is a quick determination whether everything the debtor owns is “exempt”—protected from the creditors. If everything is, then the bankruptcy trustee declares the case to be a “no asset” one, nothing is liquidated, and the debts that can be discharged (legally written off) are discharged and the case is closed.

Chapter 13 is much more complicated. It involves a court-approved payment plan usually lasting 3 to 5 years.  An intricate set of rules determine how different kinds of creditors are paid (or the extent to which they’re not paid). Those rules contain many advantages for debtors not available under Chapter 7 for dealing with their home mortgages, vehicle loans, child and spousal support, income tax liens, student loans, co-signed debts, loans secured by personal property, recent income taxes, unprotected (“non-exempt”) assets, and more.

When Congress overhauled these rules in the late 1970s to encourage more debtors to file Chapter 13 cases, it also decided that this procedure should NOT be available to people with large amount of debts. So it capped the amount of debts that a person filing under Chapter 13 could owe. Originally the cap on unsecured debts was $100,000 and on secured debts was $350,000. If an individual or a married couple had more in either unsecured or secured debts they were not eligible for Chapter 13 relief.

Increases in Debt Limits

If those debt limits sound low, indeed they have been greatly increased in the decades since then. In 1994 Congress upped the $100,000 unsecured debt limit to $250,000 and the $350,000 secured debt limit to $750,000. It also arranged for cost of living adjustments every 3 years since then. One of these adjustments is coming up on April 1, 2016. The current $383,175 unsecured debt limit is going up to $394,725 and the $1,149,525 secured debt limit to $1,184,200.

Why Does It Matter?

These current amounts may sound relatively high, at least for a relatively simple consumer case. But note that Congress was specifically trying to make Chapter 13 available to small business owners. The debt limits were intended to be high enough to “permit the small sole proprietor, for whom a chapter 11 reorganization is too cumbersome a procedure, to proceed under chapter 13.”

Fitting under the Chapter 13 debt limits matters because if your debt is too high the main alternative is Chapter 11 “reorganization.” For Congress to call Chapter 11 “cumbersome” is a huge understatement.

Chapter 13 is efficient, and thus relatively inexpensive, for debtors in many ways, one of the main ones being that creditors need to object if they don’t like what the payment plan proposes. Although there is a fair amount of flexibility for the debtor, creditors mostly don’t object as long as the debtor’s plan follows the rules. In contrast, in Chapter 11 there is a voting procedure so creditors all have their say about whether a payment plan is approved. So, much more time-consuming and expensive negotiation is involved.

For this and other reasons even the most straightforward Chapter 11 case can easily cost 10 times what a straightforward Chapter 13 would cost. As one small indication of the cost difference, the court filing fee alone for a Chapter 11 case is $1,717 vs. only $310 for a Chapter 13 case (effective starting January 1, 2016).

Clearly, if you want the advantages of Chapter 13 and need to avoid the very high costs of Chapter 11 both your secured and unsecured debts need to be below the debt limits.

What Are “Noncontingent, Liquidated” Debts?

One way to get under the debt limits is to recognize that only “noncontingent, liquidated” debts count towards those limits. (See Bankruptcy Code section 109(e).) Debts that are either “contingent” or “unliquidated” don’t count. So if you are close to or over the limits, review your debts to see if any can be excluded.

Contingent debts are those that depend on some future occurrence that isn’t sure to happen.

For example, if you cosigned a loan on behalf of a family member who is currently paying the loan on time, you won’t be liable unless that principal debtor defaults on the payments. Your liability as cosigner is contingent until and unless there a default.

Unliquidated debts are those that do not have a determinable cash value. The debt may exist but no amount has been determined. However, even if you don’t know the amount you owe on a debt but it’s “readily capable” of being determined “by simple mathematical computation,” it’s still considered liquated for Chapter 13 debt limit purposes.

For example, if you were injured in a vehicle accident, you may have hired an attorney under an agreement by which he or she will receive a percentage of the recovery if you win. The debt to the attorney is unliquidated because you don’t know how much, if any, you will owe to him or her. It is not determinable by simple calculation at the time your bankruptcy case is filed.

But these definitions are sometimes difficult to apply. For example, if a debt is disputed by the debtor does that make it unliquidated? The answer may depend on the nature and validity of the dispute. It may even depend on what part of the country you live in and how courts have ruled on this question. Arguably if the bankruptcy court would need to weigh evidence to resolve the dispute about the liability or its amount, then the debt is unliquidated.

How about undersecured debts, where the collateral securing the loan is worth less than the amount of debt owed on it? Does all of that debt count as secured for purposes of the debt limits? Or is that debt divided into the secured portion (the value of the collateral) and unsecured portion (the remaining amount beyond the value of the collateral)? Arguably the debt is divided into secured and unsecured portions. But this again may depend on the way courts in your part of the country have been ruling in these situations.

The implications here are powerful:  you could have been the undisputed cause of a serious accident or be in the midst of complicated business litigation, with huge potential liability, and still qualify for Chapter 13 relief. The amount of damages just needs to be either contingent or unliquidated.  

A Final Point: Debt “On the Date of the Filing”

The relevant statute makes clear that the debt limits are based on what they were “on the date of the filing of the [bankruptcy] petition.” So events or court proceedings after the case filing should not matter.

If a debt was contingent when your bankruptcy case is filed but then becomes noncontingent because of the later occurrence of some event (in the above example, if your co-signed debt’s principal debtor stops paying on the debt), that debt should not count for Chapter 13 debt limit purposes.

Or if a debt was unliquidated when your case was filed but then becomes liquidated because of a later evidentiary court hearing, that debt should not count either.

 

Peace on Earth, Good Will to All: Merry Christmas!

December 25th, 2015 at 2:00 am

Bankruptcy can bring you financial peace. And in that process you will likely be treated with respect and good will.

 

A Tough Time of Year

This season of gift-giving is hard when money is tight. It’s very hard when you can’t give to your kids and other loved ones what you would like to give.

This season of hospitality is hard when you want to be generous in sharing your home and food but don’t have the means to do so.

Financial Peace

The goal of bankruptcy is to give you relief from your debts and from that, give you peace in your life.

Peace in your head, so that you don’t toss and turn at night because you don’t know where to turn. Instead you can focus your thoughts on putting your talents to work in getting ahead.

Peace in your body, so that you are not constantly worn out by stress and overwork and unhealthy eating. Instead you can heal yourself through adequate rest, appropriate exercise, and calmer meals.

Peace in your heart, so that you are not constantly reminded of past mistakes and misfortunes. Instead you can again have hopes and dreams, and have the motivation to work towards them.

Bankruptcy Is a Respectful Process

Perhaps one of the biggest unspoken reasons that people don’t want to look into filing bankruptcy is because they are concerned about how they will be treated in the process. If you are being chased by collection agencies, your wages are being garnished, and are facing a vehicle repossession or home foreclosure, you probably don’t feel the greatest. At that point getting involved in a process that sounds humiliating and judgmental is the last thing you’d want to do.

But the people you’d run into in the bankruptcy process are actually quite understanding and compassionate.

Your Bankruptcy Attorney

Attorneys who specialize in representing people file bankruptcy often chose this field of law because they genuinely like to help people and to do so in a very concrete way. They are motivated by the satisfaction of turning your difficult life into a much better one. They have no reason to be judgmental or unkind, and most won’t be.

Your attorney serves you. His or her job is to help you solve your problems and show you the legal tools for doing so. You’re not told what to do—you decide what to do based on your own goals and on the available tools for achieving them. You are treated with respect as the decision-maker, as the person in charge of your life.

The Bankruptcy Trustee—Chapter 7

If you decide to file a Chapter 7 “straight bankruptcy” the main other person you’ll encounter—usually for a total of only 10 minutes or less—is the trustee assigned to your case. His or her main job is usually very simple—to verify that you don’t have any assets that are not “exempt”—protected from liquidation on behalf of your creditors.

Even though the trustee is legally an adversary, usually the meeting (at the so-called “meeting of creditors”) is cordial and very straightforward. As long as you’ve been appropriately prepared by your attorney, there should be no surprises and the event will be almost pleasant, if only from the relief of having it go as smoothly as your attorney kept telling you it would.

The Bankruptcy Trustee—Chapter 13

If you decide instead to file a Chapter 13 “adjustment of debts,” you will be dealing directly or indirectly with quite a different kind of trustee. The Chapter 13 trustee processes your monthly plan payments and distributes the money to your creditors according to the court-approved plan creditors during the course of your 3-to-5-year-long case.

But he or she has a number of other roles. This trustee is also your adversary, here in that he or she oversees your case to see that you pay as much as is legally required to your creditors during the course of the payment plan. But the trustee is also to some degree supposed to help debtors achieve the goal of completing their cases successfully. Chapter 13 trustees certainly prefer cases to be successfully completed, and some are more proactive in this. Talk with your attorney about how you can work with your particular trustee towards this end.

Conclusion

Although the bankruptcy system serves many goals, on the consumer side in practical terms it is strongly oriented towards giving people real relief from their financial problems. The system is designed to help you.

Sure, there are all kinds of rules and procedures designed to keep you honest and to be fair to creditors as well. But overall most people filing bankruptcy find that everybody they encounter in the process is considerate and often even kind, and wants to help them get the relief that they need.

You will likely be treated with good will as you get financial peace and a fresh start.

 

Qualifying for Chapter 13

August 10th, 2015 at 7:00 am

Chapter 13 “adjustment of debts” gives you extraordinary advantages over creditors, especially over certain kinds of creditors.  

 

Here’s the sentence we’re exploring today:

You can file a Chapter 13 case if 1) you are “an individual,” 2) you have “regular income,” and 3) the amount of your debts does not exceed the legal limits.

Chapter 13

Filing a Chapter 13 case gives you extraordinary power over particular kinds of creditors. Here’s a sampling of what it can do:

  • You may qualify for a vehicle loan cramdown, enabling you to significantly lower your monthly vehicle loan payments, avoid having to catch up on any late payments, and greatly reduce how much you pay before the vehicle is yours free and clear.
  • You can catch up on back child and spousal support as your budget allows, without your ex-spouse or support enforcement being allowed to garnish wages and accounts or to suspend your driver’s or occupational licenses.
  • Older income tax debts may be paid pennies on the dollar and the rest written off forever.
  • Newer income tax debts can be paid off over time—over as long as 5 years—without any accruing interest and penalties throughout that time, and without the IRS/state being able to chase you on those debts.
  • You may be able to “strip” your second (or third) mortgage from your home’s title, so you never have to make those monthly payments again, greatly reducing the debt against your home, making keeping the home more sensible for the both for the short term and long.
  • You may write off non-support debts owed to an ex-spouse after paying little or nothing on those debts.

Chapter 13 is for “Individuals” Only

Only “individuals”—human beings—can file a Chapter 13 case, according to the U.S. Bankruptcy Code.

An individual and “such individual’s spouse” may file a joint Chapter 13 case.

Unlike Chapter 7 “liquation” or Chapter 11 “reorganization,” a business entity—a corporation, limited liability company (LLC), or business partnership—cannot file a Chapter 13 case in its own name.

If you are an owner or partial owner of a business that IS in one of these legal forms, you may file a personal Chapter 13 case to deal with the debts—personal and business—on which you are personally liable.  But the business itself cannot file under Chapter 13. It either doesn’t file any bankruptcy case (for example, if it has no assets at all, or if it can continue operating without bankruptcy help), files a Chapter 7 case to liquidate its assets, or files a Chapter 11 case to reorganize under court protection.

If you are an owner or partial owner of a business that IS NOT in one of these legal forms but instead is a “sole proprietorship,” you and your business can file bankruptcy in your name, including under Chapter 13. That’s because there’s no legal separation between your personal and business assets and debts.

You Must Have “Regular Income”

You can’t just be any individual but must be an “individual with regular income.” That phrase is defined in the Bankruptcy Code as one “whose income is sufficiently stable and regular to enable such individual to make payments under a plan under Chapter 13.”

That definition is not very helpful. How “stable and regular” does your income need to be before it is “sufficiently stable and regular”?  How does a bankruptcy judge make that determination at the beginning of a Chapter 13 case, especially if it’s an income source that has had some irregularities in the past (such as from self-employment)?

The ambiguousness of this definition gives bankruptcy judges lots of flexibility about how they apply this qualification. Most give you the benefit of the doubt at the beginning of the case, giving you the opportunity to make the monthly Chapter 13 plan payments to see if you can establish that your income is “stable and regular” enough. On the other hand, if your income has truly been very inconsistent, you and your attorney may have to fight hard to persuade the judge that your income is steady enough to qualify.

Debt Limits

If you file a Chapter 7 case there is no legal limit on how much debt you can have. But under Chapter 13 there are maximums, separate ones for total secured and total unsecured debts.

Chapter 13 debt limits were imposed back in the late 1970s when the modern Chapter 13 procedure was created.  Congress wanted to restrict this relatively streamlined procedure to relatively simple situations. For people with very large debts, the more elaborate Chapter 11 “reorganization” was considered more appropriate.

Originally the debt limits were $350,000 of secured debts and $100,000 of unsecured debts. In the mid-1990s these limits were raised to $750,000 and $250,000 respectively, with automatic inflation adjustments to be made every 3 years thereafter. The most recent of these adjustments applied to cases filed starting April 1, 2013 and through March 31, 2016, with a secured debt limit of $1,149,525 and unsecured debt limit of $383,175. These limits apply whether the Chapter 13 case is filed by an individual or by an individual and “such individual’s spouse”—they are NOT doubled for a joint case.

Reaching EITHER of the two limits disqualifies you from Chapter 13.

These limits may sound high, and indeed are not a problem for most people who want to file a Chapter 13 case. But be careful because certain kinds of debts can skyrocket and exceed these maximums. For example, a vehicle accident involving serious personal injuries, especially if more than one person was injured, can result in hundreds of thousand dollars of debt shockingly fast. Also, individual liability on business debts can accrue quickly.

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